Understanding Mutual Funds: Types, Benefits, and Methods of Mutual Fund Investment

The definition of mutual funds based on the Capital Market Law no. 8 of 1995 article 1, paragraph 27 is a place that is used to collect a certain amount of money from the investor community so that it can then be invested in a securities portfolio by each investment manager.

That means, as reported in Investopedia, the notion of a mutual fund is like a basket owned by the MI or the Investment Manager in which the container will then be filled with various types of shares. The basket containing the stock depends on the recipe, concoction or processing of the MI.


1 Understanding Mutual Funds

1.1 Open Mutual Funds
1.2 Closed Mutual Funds
2 Types of Mutual Funds Based on Portfolio

2.1 1. Equity Mutual Funds
2.2 2. Mixed Mutual Funds
2.3 3. Fixed Income Mutual Funds
2.4 4. Money Market Mutual Funds
2.5 5. Index Mutual Funds
3 Characteristics of Mutual Funds
4 6 Benefits of Mutual Funds in General

4.1 1. Professional Management
4.2 2. Investment Diversification
4.3 3. Transparent Fund Management
4.4 4. High Liquidity
4.5 5. Low Cost
4.6 6. Minimal Risk
4 Steps to Invest in Mutual Funds

5.1 1. Perform Transactions on Exchange Days
5.2 2. Net Asset Value (NAV) As the basis for Transaction
5.3 3. Pay attention to the Cut-Off Time
5.4 4. Get a Confirmation Letter for Buying Mutual Funds

Understanding Mutual Funds

We have explained above that the definition of mutual funds is a place to manage money or capital from several investors on investments available in the market by purchasing a unit of mutual fund participation.

Meanwhile, the understanding of mutual funds based on the capital market law is a place in which various money is collected from the public to be reinvested by the investment manager or MI. Later, the funds invested can be in the form of stocks, money markets, bonds, etc.

However, mutual funds are generally divided into two types, namely open mutual funds and closed mutual funds. Here is the explanation.

  • Open Mutual Fund

An open-ended mutual fund is a type of mutual fund investment that can be resold without any method of selling on the stock exchange in an MI company. Usually, most mutual funds today are open-ended mutual funds with a selling price that is generally equal to a net asset value.

  • Closed Mutual Funds

Closed mutual funds are types of mutual funds that cannot be resold to MI companies. Usually, the participation units can only be traded on the stock exchange at a selling price that is below the asset value.

Due to the limitations of investors to invest for a long period of time, the amount of funds or assets in mutual funds is not large. However, there are four important elements that must be understood by potential investors.

First, a mutual fund is a collection of funds from a number of investors. Second, the funds will be invested through investment instruments. Third, the mutual funds will be run and regulated by a credible and professional MI. Fourth, mutual funds are medium to long-term fund investment instruments.

Types of Mutual Funds by Portfolio

Based on the understanding of mutual funds that we have discussed together above, mutual funds are divided into five types based on their portfolio, namely:

1. Stock Mutual Funds

The definition of a stock mutual fund is a type of mutual fund in which a minimum of 80% of the funds collected will be managed in the form of shares. The profits obtained from stock securities will provide greater results in the form of capital gains because there is growth in dividends and stock prices in them.

This type of mutual fund is considered capable of bringing very high profits but still accompanied by high risks.

2. Mixed Mutual Funds

The definition of a mixed type mutual fund is a mutual fund that has the potential for losses below stock mutual funds. It will invest in two stock exchanges simultaneously, namely equity securities and debt securities. The comparisons contained in the two securities are not included in fixed income mutual funds and stock mutual funds.

3. Fixed Income Mutual Funds

The definition of a fixed income mutual fund is a mutual fund in which at least 80% of the funds collected will be managed into a stock exchange with a debt nature. The potential for profit from this type of mutual fund is quite high, which is accompanied by a high potential for loss. However, the profit potential is higher for equity and mixed mutual funds.

4. Money Market Mutual Funds

Understanding money market mutual funds are mutual funds that provide a much lower risk of profit but with a limited potential return value. A minimum of 80% of funds from money market mutual funds will be managed in the money securities market in the form of debt securities with maturities of less than one year such as deposits or SBIs.

5. Index Mutual Funds

The definition of an index mutual fund is a mutual fund with the same potential profit and loss as the index. Most of the funds in this type of mutual fund will be managed passively. This means that there will be no buying and selling on the exchange unless there is a new subscription or redemption.

Mutual Fund Characteristics

There are ten specific characteristics that distinguish mutual funds from other types of investment instruments. First, a mutual fund is a securities company or asset management company that is sold by a mutual fund selling agent, be it a bank or other securities company. Second, there is no insurance fee or sum assured for mutual funds. Third, the value of the mutual fund purchase fee is 0% to 2% of the mutual fund value.

Fifth, mutual funds do not have administrative costs. Sixth, the cost of selling mutual funds is 0% to 2% of the mutual fund value in the first year. Seventh, the amount of funds allocated for deposits in the first year is 98% to 100%.

Eighth, mutual funds only use one price. Ninth, usually mutual fund sales will display a prospectus and fill out a risk profile. Tenth, the majority of mutual fund investors come from institutional and retail circles. Lastly, most of the mutual fund investors already understand the mutual fund product they are going to buy.

6 Benefits of Mutual Funds in General

At least, there are six interesting benefits in doing or being involved in mutual fund investments. The following are six common mutual fund benefits.

1. Professional Management

As we explained above, the funds collected will be managed by a professional Investment Manager or MI who is also an expert in managing funds that are limited in time. The Investment Manager has a very important role in managing the existing portfolio in mutual funds.

2. Investment Diversification

With the diversification of investments, it will be able to help minimize the risks contained in the portfolio. Even so, no one can avoid the risk of investing in mutual funds.

3. Transparent Fund Management

Transparent fund information from mutual funds can be used to control profits with the development of costs and portfolios on an ongoing basis. Usually, the management of this fund will be issued with a net asset value in the middle of each year and also annually on a regular basis, so that investors can control the development of their investment funds.

4. High Liquidity

High liquidity can increase the potential for success in investing. The investors will disburse their participation units in accordance with the provisions that have been prepared in the mutual fund in order to make it easier for investors to manage their finances.

5. Low Cost

Because the funds contained in mutual funds are obtained from a group of investors who are managed professionally by the Investment Manager along with their ability to invest, the transaction costs incurred by each investor are also relatively low.

6. Minimal Risk

Every investment instrument has its own risk of loss, including the nature of mutual funds. However, the high interest from middle to upper-class investors to invest in mutual funds shows that the risk of loss in them is minimal.

4 Steps to Invest in Mutual Funds

The following are 4 important steps in doing mutual funds, namely:

1. Make a Transaction on the Exchange Day

The first way is to register yourself like opening a bank account, later you will be asked to fill out a form and sign it, prepare various photocopying requirements that have been determined, and finally you have to prepare a number of funds that will be used for investment purposes.

2. Net Asset Value (NAV) As the basis for Transactions

NAV or Net Asset Value is a value that represents the total wealth of your mutual fund each day. NAV is influenced by the market price of mutual fund assets and the strength of demand and supply of investors. Later, the mutual fund price will be published in newspapers or online once a day.

3. Pay attention to the Time Limit ( Cut-Off Time )

The deadline will be from 12 to 1 pm. If you buy mutual funds before the deadline, you will get the NAV price on the transaction date. Meanwhile, if you make a purchase that passes the time limit, then you will follow the NAV price on the next day from the date of your mutual fund purchase.

4. Get a Mutual Fund Purchase Transaction Confirmation Letter

When you have completed the transaction, you will later be sent a confirmation letter for purchasing the mutual fund transaction that has been issued by the local custodian bank. You will also get a report on the progress of investment funds every month.

It’s a good idea to keep this report as proof of your mutual fund ownership. If you do not get the report, then you must ask the selling bank or your investment manager.

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